For more than a decade, Microsoft (MSFT +1.01%) has been playing catch-up with Apple's (AAPL +0.11%) market-defining products. The iPhone and iPad defined categories that Microsoft had no answer to and the popularity of the tablet has rendered the PC a dinosaur in computing.
Yet Microsoft has continued to grow revenue and income, despite these challenges, something that often goes overlooked.
MSFT Net Income TTM data by YCharts.
Now that Microsoft has released Windows 8 and Xbox One, I think the company's strategy is coming into focus and it's time to consider whether Microsoft stock is worth buying.
Xbox One brings Microsoft into the living room
Windows Phone 8 and the mobile versions of Windows 8 look like catch-up products for Microsoft, but Xbox One has the opportunity to define the future of television and gaming. In theory, the new console will bring gaming, television, and streaming media onto one device. For years, this has been the goal of Apple, Sony, Google (GOOG 0.57%), and even Nintendo, who hoped to create the living room hub that connected people to the world.
Steve Jobs said he "cracked" the TV in 2011 and Apple could create a device that could seamlessly sync with all of your iDevices and the iCloud. Apple TV is a step in that direction, but nearly two years after Jobs' proclamation, we're still waiting to see a game-changing product from Apple. The long-rumored iTV isn't even on the horizon yet.
Google gave it a shot with Google TV, but the product lacked functionality and never gained traction with consumers. But Google TV is pre-installed on many new TVs, so it has a solid installed base if functionality improves.
For both Apple and Google, the living room is a vast untapped market that could provide growth and momentum for other devices. Apple's AirPlay allows its devices to sync with Apple TV, and with app development and more accommodation from media companies, Apple could change the way we look at TV. Google isn't as far along in its TV development, but with the largest share of smartphone operating systems and a growing presence in tablets, it should look at the living room as a growth avenue.
But while Apple and Google have made limited progress with their TV products, Microsoft hopes it has learned from their mistakes and has given consumers a compelling product with Xbox One. It may not have perfected its integration in the first iteration, but it's a step in the right direction. The Smartglass capabilities that allow Google Android, iOS, and Windows mobile devices to interact with Xbox One make it a more friendly device than a closed system like Apple TV.
The importance of Xbox One can't be understated. What Microsoft is trying to do is create an ecosystem that rivals Apple or Google's, drawing consumers in and making it more appealing to buy other Microsoft products. Xbox One will be the center of that sales pitch and should help mobile device and cloud sales in the process.
At the very least, Xbox One has a chance to be the consumer product home run Microsoft is looking for.
Behind the scenes, Microsoft is king
Microsoft may be getting a lot of heat because Windows 8 hasn't been a smashing success, but the company's behind-the-scenes businesses are thriving. In the first quarter, the server and tools division grew 11.2% and the Microsoft business division grew 8.2%. Even if the company isn't selling many new copies of Windows 8, Microsoft Office is still a vital tool for and the server business plays a key role in making companies run.
These aren't sexy businesses like Xbox or Windows 8, but they're vitally important to the future of Microsoft and a key the company's continued growth.
Microsoft stock is a great value
I like Microsoft's strategic position, and the stock's value is very appealing as well. The company has a market cap of $285 billion, has $60 billion of net cash, and has generated $16.4 billion in net income over the past year, including a $6.2 billion charge for writing down aQuantive. Adjusted for cash and the writedown, the stock has a trailing P/E of about 10, a great value for a company growing in the high single digits.
Microsoft will continue to grow its behind-the-scenes businesses, which really drive the company's results, and if it can gain share in mobile and generate buzz from Xbox One, the stock should continue its strong run this year. Microsoft stock is still one of the best buys in tech.
